Over the past few years HMRC has become a much more efficient tax-collecting machine, especially when it comes to those seeking to avoid tax. Its investment in a £45 million computer system, known as Connect, has allowed it to draw together information from a wide range of sources. These include banks here and overseas, the DVLA, land registry, local councils and even energy companies and private businesses. This information is used against a database of taxpayers to highlight anomalies, and identify target groups.
In recent years, people as diverse as doctors, dentists, Avon ladies and taxi drivers have been targeted. The Revenue sees the middle class as soft targets, in that they are most likely to admit tax avoidance when challenged, making them fertile ground for back tax, penalties and interest charges. Barristers are forecast to be next in the firing line, along with those described as multiple sources of income – a description that could affect a farm business with a diversification enterprise, and the farmer and/or their spouse also having a part-time job or carrying out services for other people.
If you are unlucky enough to be selected you will not know the reason. It begins with a brown envelope from the HMRC raising a general enquiry. This could be something that has been found, perhaps via an investigation of someone else, a query about your tax return or because you are in one of the target groups. It is important to remember that the Revenue does not go on fishing trips for information. It can only begin an investigation if it has concrete facts. Remember, too, that this is about a return for the time spent – they will not be spending time on an investigation to yield £100 in unpaid tax.
The first letter will be vague, but ultimately you will be asked very specific questions about any area of your business or personal life. The first thing is not to panic. Tax investigations are complex, and you need to involve your accountant or a specialist in investigations – often ex-Revenue employees – from the outset.
If you know there is something there that they are after it is better to admit it early, as a mistake on your part, because the longer the investigation goes on the greater the penalties and the less room you have for negotiation. Remember, it is your responsibility to have available documents, such as bank statements. Saying these have been destroyed for security reasons will not wash. You will be expected to produce duplicates.